Divestitures and mergers & acquisitions (M&A) can be used effectively by companies to restructure their businesses as well as meet the strategic growth objectives of the business. Divestitures involve selling off a business unit or assets (although as pointed out in our post Divest for our Future, divestitures can consist of straight sales, spin offs, equity carveout, Reverse Morris Trust, or joint venture), while M&A involves combining two or more companies. Strategic divestitures are often focused on shedding non-core operations or assets, permitting proceeds to be re-invested in the company’s core business to fund organic growth or acquisitions closely aligned to the business strategy.

There is no universal answer as to whether an M&A or a divestiture strategy is more successful, as the success of each strategy depends on the specific circumstances of the companies involved. Reasons for divesting a business include not part of the core business, the need to generate funds, lack of internal talent for business, opportunistic approach for the asset from a third party, and regulatory or tax structure. An EY study published on November 24, 2022, of more than 750 CEOs finds 28% of CEOs say the most important strategic action their company will take in the next six months is divesting assets to raise capital for investing in other parts of the business.

Divestiture history lesson: from Emilie Feldman’s excellent book Divestures – In 2015, the New York Times’ Andrew Ross Sorkin gave his DealBook readers a pop quiz: “Which company has created more value for shareholders over the last two decades: Disney, Microsoft or IAC/InterActiveCorp?” Mr. Sorkin speculated that most people might guess Disney or Microsoft, but the correct answer is in fact IAC. By buying, scaling, and spinning off businesses Barry Diller created remarkable value. Indeed, 11 public companies emerged from IAC between 1995 and 2021, creating $100 billion of shareholder value in the process.

Like all business tools, divestitures can be the best method to achieve your strategic objectives.

Specifically, there are some factors that may make divestitures a more appropriate route to growth than M&A for your company:

  1. Focus: Divestitures can help companies focus on their core competencies and shed non-core or underperforming assets. This can lead to improved performance and profitability. In contrast, M&A can sometimes result in companies diversifying too much, losing focus on their core competencies, and becoming less efficient. Bad acquisitions result in leadership spending more time on the new acquisitions at the expense of the core business.
  2. Cultural fit: M&A can involve combining two or more companies with different cultures, which can lead to clashes and difficulties in integrating operations. Divestitures, on the other hand, involve selling off a business unit or assets that may not fit with the parent company’s culture, but may well fit better in a larger group with a stronger strategic fit and similar culture.
  3. Cost: M&A transactions are often expensive and complex, involving due diligence, negotiations, and integration costs. In contrast, divestitures can be simpler and less expensive for the divesting company
  4. Risk: M&A transactions can be risky, as they involve combining two or more companies with different business models, strategies, and cultures. There is a danger that the integration will not be successful, and the combined company will perform poorly. Divestitures, on the other hand, involve selling off a business unit or assets to a more appropriate parent who is keen to put the deal to bed and develop the business.
  5. Regulatory approval: M&A transactions may be subject to regulatory approval, which can be time-consuming and uncertain. In contrast, divestitures may not require regulatory approval, making them quicker, more certain, and in fact the catalyst could come from regulatory pressure. However, the divestor needs to choose the new potential owner with care to avoid the acquiring company facing the same risk.

From a personal perspective, when I was President of the Americas for Mondi, a large international packaging and paper company, we were approached by Graphic Packaging.  They were looking to divest of their Paper Bag operations in the United States, a total of ten plants.  They were motivated to sell as this business unit was not performing to expectations and negatively impacting the core business units of the company.  Mondi, on the other hand, was interested and could see the strategic fit with its Industrial paper bags division.  We followed normal due diligence and financial analysis, before consummating the deal, but in the end, we executed the deal. It was a win for both companies. Graphic Packaging’s stock increased with the announcement of the deal as did Mondi’s. Mondi became the largest and premier Industrial Bag business.  North America. And we were able to consolidate plants, bring superior processing and production assets into the Graphic Packaging plants, achieve cost synergies, and grow market share.

To summarize, divestitures and M&A are both valid strategies for companies, and their success depends on many factors. Divestitures may be more successful than M&A in certain circumstances, such as when a company wants to focus on its core competencies, avoid cultural clashes, reduce costs, lower risk, or avoid regulatory approval.  However, make no mistake, divesting an asset or selling an entire product line or business unit comes with a long list of challenges—costs, timelines, and disruption to business as usual, to name just a few. If you have a business that no longer fits with your strategy, divesting at the appropriate time can increase your return.

At TPP, we help clients navigate complex market and economic conditions to become prepared sellers, incorporating their divestment goals and planning for execution to maximize deal value.